Much Ado about FDI

Our Parliament is all up in arms against FDI in the retail space , with Uma Bharti screaming as if she is one of the bad guys in a Guddu Dhanoa movie. However , all this outrage is meaningless as influx of 100 % FDI into Indian retail might change the landscape but to the benefit of both customers and retailers.

Currently the Indian Retail Industry is suffering from multiple problems  - abundance of malls, inability to convert footfalls into customers and inability to maintain decent cash flow from operations. With large loans on their balance sheets, these firms have not been helped by their inability to maintain costs while scaling operations properly.Add to this the absence of a proper supply chain system in many retail chains, along with lack of data mining or data analysis to identify consumer trends and we have a retail system which fails to identify what customers want and their basic problems with the system.

The introduction of 100 % FDI should bring in some positive benefits to the retail sector. We will probably find greater professionalism when it comes to setting up retail chains and systems with improvements in supply chain and operations , leading to lower costs in the long run. Introduction of foreign retail chains will also force Indian firms to shore up or get out which will bring in consolidation in the retail sector , hopefully eliminating a large number of the underperforming retail chains .

The problems that the large foreign chains will face is simply two : a) Space Availability b) adjustment to the Indian customer mentality. Unlike in First world countries where people usually drive to malls like Walmart / Sam’ s Club or Metro which is miles away from their home, here the malls will have to closer to the actual customer. This implies significant investment in real estate/ buying up existing kirana stores / small supermarkets and utilizing that space. Further, companies like Walmart / Carrefour which invest heavily in warehousing and other supply chain operations will have to remember to consider both restrictions placed by the government as well as the requirement for significant investment in warehousing systems, which are hitherto absent in India.

The bigger problem for the major retail chains will be adjusting to the Indian customer mentality. The indian customer already gets a lot of his products through local contacts such as the local subziwala , the kirana store who delivers to his house and so on. Retail chains will have to provide value added services/ significant cost differential to get the customer to switch.

For the kirana stores,there are some positives in this situation. They can sell out to the large retail chains/ become their franchisees or actually stick to providing quality products which would not be easily available at the retail chains ( for example . local spices/ condiments which probably would not be a mass produced item for the retail chains to be interested in them).

In the end, the choice is whether to stick with protectionism and hamper the chances of the Industry growing further. One only has to look at the telecom sector to see the advantages of allowing FDI investment , for the end customer and the government. This may just be the correct moment for influx of funds into the ailing retail sector , which in turn should generate more jobs.

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